Is the Price Right? Ask Jay Walker

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Like every other network before it, the Internetwill eventually become as routine as the highway system,electric grids, and telephone networks. And when it istaken for granted in a few years, only companies thatdeliver lower prices using the World Wide Web will survive.

That contention may not sound surprising coming from Priceline.com founder and vice chairman Jay Walker. He argues that lower prices are the only factor separating Internet-based e-commerce from other sellers of goods and services. People will not pay more for convenience in the long run, Walker told the eighth annual Wharton Technology Conference last month. That is why Wal-Mart became the largest retail store in North America instead of 7-Eleven, and why Dell Computer is the best-selling PC maker.

"Every network that has come before has pulled people in," Walker says. "Now it's the information grid. We don't think about the electricity we are bathed in every day. And the definition of business has to change. We as an industry and a society are rewriting the rules of business as we learn what this network can and can't do."

Walker defines business as any enterprise that can deliver value on a sustainable and competitive basis. And price must be where companies distinguish themselves. The key is letting the customer decide the price he or she is willing to pay, the central tenet of Priceline.com, which opened in 1998 and went public in March 1999. The Norwalk, Conn., company provides a "demand collection system" for aggregating consumer requests. A patented process lets bidders set their price on items ranging from groceries to new cars and airline tickets and delivers that information to suppliers who can confidentially accept or reject the offers.

Priceline is betting that large groups of consumers are prepared to be flexible about their demands if that means getting a lower price, Walker says. Once sellers in any marketplace set their prices, they do so to ensure that the customer gets a certain measure of quality. Discounters can cut margins to lower consumer prices, but they cannot sustain that advantage indefinitely. Someone will eventually make a sale at a loss to raise cash.

But when buyers name their price based on imperfect information, they may not pick the lowest possible price. They may even offer more than the retail asking price if the item is valuable enough. And the entertainment feature that comes with an auction or competition for the item adds consumer interest and value.

"Once you have enough food to eat, the most important issue is price. That is why people modify their behavior every single day," Walker claims. "You can't have a price advantage with a fixed price. If your e-commerce business can save people money, you have more slack. Convenience is nice, but savings are crucial. Disneyland reinvented amusement parks not by engineering out costs but by adding more value and raising the prices."

Other Internet companies including Lendingtree.com, Iown.com, and Progressive Insurance have facilitated the delivery of several bidders for a customer's business. Those companies, and others, return offers for mortgages, insurance policies, and loans by competing on more than price or interest rates. The companies also provide flexible terms, additional service, complementary products, or some other benefit.

Despite the current frenzy to implement business-to-business e-commerce, Walker is confident about the prospects of the business-to-consumer market. When professional buyers and sellers meet, there is a matchup of expertise, and it creates a team that is "phenomenally good at destroying the middle" and "rules out anything but commodity margins," Walker claims.

Priceline recently began to offer customers the ability to bid for groceries online. During the first 13 weeks of the program's launch in New Jersey, 200,000 people enrolled, spending about a half-hour online bidding for their selections. The average household income of participants is $73,000 per year, Walker says.

When purchasing grocery items, buyers must select from two or more acceptable brands, not knowing which one they will get until they check via e-mail. Then they must go to the store, pick the items off the shelves and separate those items paid for with Priceline.com from their other merchandise. A software feature lets online users watch a wheel resembling a slot machine to inform them whether their bids are accepted or not, giving the impression that they are "winning" their groceries. But for Walker and Priceline.com, maintaining the anonymity of sellers is crucial to the bidding process.

Delta Air Lines can't publish its fare on a particular flight for retail sales and privately offer a "What am I bid?" price elsewhere. It can do that, however, if the buyer is not sure whether he will get a ticket from Delta or a competing carrier, Walker contends. Similarly, the shopper still goes to a nearby participating grocer, but may not know which company in the supply chain has cut its profit margins to make the sale.

"Manufacturers want to sell at lower prices but cannot do so without destroying their rate card," Walker points out. By shielding sellers from buyers and creating a new consumer network, costs will come down, he claims, and the reliance on name-brand goods may decline.